The government has published its long awaited draft legislation setting out its proposals to resolve the approximately £7bn worth of rent arrears which accrued during the pandemic. The catchily-titled Commercial Rent (Coronavirus) Bill had its first reading in the House of Commons on 9 November, and the government simultaneously published a revised Code of Practice for commercial property relationships following the COVID-19 Pandemic - you can find the link to the Bill and Code of Practice here and here respectively.

There are plenty of details for practitioners to puzzle over, but the shape of the scheme is reasonably clear. Rent arrears which relate to periods of time during which businesses were subject to mandatory closure orders (and consequential restrictions on the use of their premises following re-opening) will be ring-fenced. This means that landlords cannot avail themselves of any of the usual remedies for arrears such as forfeiture, CRAR, debt claims, winding up or bankruptcy petitions etc to recover these "protected rents". Instead, landlords and tenants will have six months from the date on which the Act comes into force to refer their dispute over the outstanding rent arrears for determination by an arbitrator.

There will doubtless be lots more to say and advice for landlords, tenants, guarantors, investors and lenders on the specific provisions of this legislation, but here are five issues which have caught our eye and which are worth bearing in mind while the legislation passes through parliament.

1. Certain provisions will apply retrospectively

Although this legislation is not yet in force it provides that certain actions against debtors which take place in the period between 10 November 2021 and the date on which the Act comes into force will be affected by the legislation.

Any debt proceedings for the recovery of a "protected rent debt" made in the period from 10 November 2021 to the date on which the Act is passed will be subject to an automatic stay of proceedings, on the application of either the landlord or tenant. In effect, this means that there is an immediate moratorium on any new debt claims for rent arrears which fall within the protected period. It is not currently clear what will happen to proceedings where judgment has already been given in favour of the landlord (see for example recent cases involving TFS Stores (our article on this case can be found here), Cineworld, Sports Direct, Mecca Bingo and Picture House). There may also be some uncertainty around proceedings which are currently on foot but where no judgement has as yet been made.

In addition, the bill closes a loophole which allowed landlords to pursue a bankruptcy petition against individual tenants in respect of the relevant rent arrears. The bill provides that any bankruptcy order which relates to a protected rent debt and which is made on or after 10 November 2021 but before the date on which the relevant provisions come into force will be treated as void.

2. No impact on existing rent concession agreements

This is wholly unsurprising but the bill makes it clear that none of its provisions will have any impact on existing rent concession or rent relief arrangements made between landlords and tenants.

Undoubtedly, some tenants will be looking very closely to see whether rent concessions do qualify as “agreements” and we would expect to see disputes concerning whether or not a valid agreement on rent relief has already been reached where one of the parties thinks they could achieve a better outcome through the rent arbitration scheme.

3. Viability is the first hurdle

The arbitrator will have to go through a two-stage process when determining the appropriate rent relief which should be awarded. The first test is whether or not the tenant’s business is viable or whether it could be if the appropriate rent relief were granted. If a tenant fails to convince the arbitrator that its business is or could be viable then the application for rent relief will be automatically denied and the tenant will have to take its chances through the usual routes.

It is clear from the guidance and Code of Practice that the rent arbitration scheme is not designed to protect insolvent tenant businesses but to consider whether businesses which are struggling to meet their obligations and continue trading could return to solvent trading. The bill makes it plain however that, when assessing the tenant’s ongoing viability and ability to pay, the possibility that the tenant could take on more debt or go through a restructuring should be disregarded.

4. It'll be a balancing act

If the tenant satisfies the viability test the arbitrator will go on to consider the proposals put forward by each of the landlord and tenant for rent relief. The arbitrator will be directed to favour the proposal that is most likely to:

  • Preserve (or restore and preserve) the viability of the tenant’s business, but only so far as that is consistent with preserving the landlord’s solvency
  • So far as is consistent with the preservation of its business, tenants should meet their obligations and pay the protected rent in full and without delay

These principles may be well and good in theory but we would expect there to be significant disputes regarding how the need to preserve/restore the tenant’s business should be balanced with the landlord’s contractual right to receive payment in full under the lease. Arbitrators will need significant skills in accounting, including potentially forensic accounting, in order to assess the viability of the tenant’s business and any insolvency risk to the landlord.

Some landlords with large portfolios of retail and hospitality tenants may well make the argument to an arbitrator that if all of their tenants are granted the same level of rent relief then their solvency would be put at risk, but it is not clear from the draft bill whether the arbitrator will be able to take this into account or whether it will only focus on the specific tenancy in the referral and the impact of the requested rent relief to the landlord in isolation.

5. "Arbitrated" debt will be excluded from any tenant restructuring

This is an interesting provision and one which will be of relevance where the tenant may be considering a CVA scheme of arrangement or other restructuring. The draft bill provides that any ring-fenced rent debt that has been referred to arbitration may not be included in any restructuring for a period of 12 months after the conclusion of the arbitration process. Landlords who think that a tenant may be considering a restructuring will want to weigh up the risk of entering the arbitration process as against the risk of being forced to accept a potentially more painful write-down in the rent along the lines of recent restructurings e.g. Virgin Active, New Look, Regis etc. Please see previous articles here and here about these restructurings.

Landlords and tenants with outstanding arrears on their books from the relevant period will be looking at these provisions closely over the coming months. The scheme may help to preserve viable tenant businesses, but arguably the vast majority of outstanding arrears are owed either by businesses which are unlikely to pass the viability test (particularly if the option of borrowing and/or restructuring must be disregarded) or well-financed tenants who have chosen not to pay. We will be putting together more detailed guidance in due course, but please feel free to get in touch with one of our team for a general chat about options.